Creating global order

Too many multinational companies have created a haphazard network of plants, according to new research, but putting the pieces in the right places can reap huge benefits.

The location and organisation of a company's factories will usually be the result of inheritance rather than design. This means that many leading firms have manufacturing structures that have evolved incrementally over time, through organic growth and merger-and-acquisition activity.

The resultant legacy is a collection of plants that typically lacks global coherence and is geared more to serving yesterday's customers than tomorrow's. Moving from this legacy is slow and hazardous. The transfer of assets and knowledge is difficult, transition costs are high, and supporting supply chains and infrastructure systems are gradually becoming established.

However, as globalisation accelerates, the huge benefits to be gained from reconfiguring manufacturing are becoming increasingly accessible.

Here we describe a structured approach to understanding and exploiting a company's international 'manufacturing footprint' - the location of its plants around the globe, what their roles should be and how they interact with each other.

We have captured the experience of more than 15 years' worth of research into international manufacturing, together with four years' close engagement with major multinational corporations. The research foundations that underpin this work with our industrial partners have supported the development of robust new approaches to the review and restructuring of their manufacturing operations.

This is at a time when understanding the rationale behind a particular configuration is becoming increasingly complex. The worldwide industrial picture is constantly changing, with emerging economies offering new capabilities as well as access to fresh markets, and many industries are undergoing significant consolidation and restructuring.

Make or buy

Developing approaches that ensure the right decisions are made in this evolving context is challenging - but offers huge potential rewards. For many companies, getting it right can represent the difference between success and failure.

Deciding which things to make in-house and which to outsource should clearly precede any reconfiguration of the manufacturing network. Tempting as it is to think about outsourcing and offshoring at the same time, this is essentially about finding the right degree of vertical integration regardless of where the production facilities are or will be located.

Determining the make-or-buy strategy provides an important foundation for footprint strategy as this confirms the components and process platforms that need to be included in manufacturing plants. When the strategic direction is defined and the risks understood, it is still necessary to do the detailed due diligence against individual opportunities. What this then provides is a set of corporate guidelines that can be used to justify all capital expenditure in production assets, asking whether it reflects the strategic make-or-buy direction as well as making financial sense. It also provides guidance to the procurement team on the outsourcing priorities, including the sensitive areas where special relationships are required.

This also steers the technology function in developing new process technologies, which underwrite the differentiated capabilities that manufacturing can provide and competitors find difficult to copy. Few companies have been able to put into words their overall make-or-buy strategy yet the words are not that difficult.

Balancing act

Having tackled the make-or-buy issue the next step is to decide where to locate plants and to plan the means for realising this vision. Finding a robust but practical solution to plant location is a balancing act. If we rely on the latest computer optimisation techniques, we may drown in data and might lose sight of the underlying strategic principles. Conversely, by considering options at too high a level, we may converge on over-simplified and generalised guidelines which can appear meaningless.

The suggested approach is illustrated on page 67. The first step is to understand the framework for analysis, and to tailor it to the needs of the particular organisation. This involves laying out the master process itself, creating basic definitions and defining simplifying assumptions.

One important element of the approach in large organisations is to split the problem into manageable pieces, and this normally involves separate analysis by a global product group. This works because families of products tend to have similar production characteristics and market requirements. The global product manager then becomes the natural 'internal customer' for the process.

When the approach is clear, the basic structure of the network needs to be defined in terms of plant roles and the principles for coordinating them. Once this is established the actual location of plants can be considered. The resulting footprint options are then assessed using a balanced set of strategic performance criteria.

The process of optimising across product groups, here termed 'aggregation', is a crucial step because significant synergies can be generated through shared assets and overheads.

The enterprise solution is then tested against different views of the future and key risks. The overall process is essentially iterative, with two key feedback loops. The first involves the refinement of product group footprints based on assessed performance. The second involves the refinement of enterprise solutions to make them more robust to possible risks and changes in world conditions.

The approach is suitable for repeated application on a regular basis, either as part of the normal annual business planning cycle, or as triggered by major changes such as acquisitions, market expansion or macro-economic swings.

Footprint strategy also requires the involvement of a broad range of senior managers across the enterprise. Representatives from operations, marketing, technology and finance, covering all product groups and regions, need to be involved in forming and finalising the vision. Implementation leaders need to be involved early to ensure feasibility and ownership. Clear communications with senior stakeholders should be established at the outset to ensure effective steering at board level.

Building blocks

Plants are the fundamental building blocks of the global manufacturing network, but they each cannot excel at everything. There are clear benefits in defining what a plant is expected to do and how it will be measured. A network of differentiated plants can supply the global market more effectively than a collection of identical plants. It is critical to define the roles of individual plants more precisely if the network is to be effective. It is useful to think of four aspects of a plant's role. Firstly, its position in the process stage or supply chain: some plants may produce finished products, others produce the feed-stock for these finishing plants and yet others may carry out the complete conversion process.

Secondly, the logic behind the plant's configuration or layout: for any type of operation there is a limited range of configuration choice within which flexibility may be emphasised at the expense of production cost or vice versa.

Thirdly, the rationale for particular locational benefits, or geographic purpose: plants may be sited to take advantage of low-cost inputs, to secure scarce resources such as materials or skills, or to facilitate market penetration. This rationale should not be neglected when constructing alternative network options.

Finally, the activities carried out at the plant: these may range from basic production and maintenance with no local scheduling, to capacity scheduling, process improvement and even product innovation. Each incremental activity adds complexity, but offers potential compensating benefits in local flexibility, provided this fits within the coordination principles established for the network. Each of these aspects must support the fundamental mission of the plant. Not all of them will be relevant in every case, but formal consideration will prevent issues being overlooked.

Not all of the potential plant roles will be used in every scenario generated. However, by specifying plant roles before discussing where the plants should be situated, the company develops a 'language' which makes it easier to describe the network and how plants contribute to its objectives.

Location, location

Determining the desired location of plants is the next stage in specifying a global manufacturing footprint. This involves scenario development and detailed analysis but there are rules of thumb that can help in simplifying the challenge.

Many companies feel their manufacturing network does not give them sufficient economies of scale and that one with fewer plants would rectify this. However, there are limits to this approach.

Firstly, some technologies benefit more from scale than others. A plant that is characterised by largely manual operations has less potential for economies of scale than one that is highly automated. Secondly, as the number of plants is reduced, the average shipping distance between the various plants and customers typically increases. This results in higher logistics and inventory costs, which offset the reductions in ex-works cost. It also leads to slower response times, which can adversely impact customer service.

The existence of import tariffs complicates the analysis, but once again tends to limit the extent of plant consolidation. Increasing plant size can also result in operational complexities, which cause scale diseconomies. The complexity can be the result of the increased variety of products being produced or simply the number of people being managed on one site. The size at which these diseconomies bite varies between industries, technologies and even corporate and national cultures. In practice, many companies adopt a rule of thumb regarding maximum plant size.

Another cause for concern for many companies is the high wage structure in many of their plants. This may suggest relocating production to lower-wage economies but, once again, the degree to which this is possible will be limited by a number of factors.

The first thing to consider is the proportion of the ex-works cost that is represented by labour. A manufacturer with a highly manual process will benefit much more from relocation than one with a highly automated process. There are other reasons why moving manufacturing operations to low-cost economies may be inadvisable. These often involve cases where it is important to keep manufacturing close to customers to maintain high levels of service, or close to the new product development function to enhance innovation. Other factors which limit relocation may include exposure to intellectual property abuse and the lack of suitable skills for critical operations.

Cost factors

Moving offshore may also offer opportunities to make significant raw material savings, whether through cheap local prices or increased negotiating power resulting from higher local consumption by larger plants. However, it may be possible to achieve comparable, or greater, savings by more effective global purchasing and sometimes the apparently cheaper local materials may not be available in an equivalent specification. Nevertheless, it does appear that manufacturing presence in low-cost economies can result in significant materials cost reduction.

Eventually, any major footprint changes will need detailed invest--ment evaluation comparing landed-cost savings with the required transition costs. Such evaluations may prove too cumbersome for the rapid screening implicit in this process, so a simple means to handle transition costs must be found.

There are two approaches that are typically used. Companies simply seeking to establish a long-term direction might choose to ignore transition costs, arguing that, over the long term, normal replenishment capital will fund the establishment of new facilities. Alternatively, approximations of transition costs can be factored in. The latter approach is usually preferable as, in practice, high transition costs may limit the possibilities, so consideration is required to help compare footprint options and to create a shortlist of the most attractive feasible solutions.

The following costs will need to be assessed: moving production equipment between plants; investing in new equipment; starting up and closing plants, including severance; capturing and transferring knowledge; and ramping up production.

Many companies have older plants which feature prominently in their history. Finding potential solutions for these emotionally and politically important sites may be a critical part of the process. Often such sites embody a great deal of tacit knowledge that provides unrecognised support for other operations. If such a site must be closed or downsized, it is vital to retain this knowledge within the network. While it is important to challenge any claims that sites must be left alone, it is also important to recognise when such issues exist and to avoid devising scenarios which cannot be implemented.

Outsourcing and offshoring

Many recent restructuring projects have involved outsourcing and offshoring, driven by a cost-reduction logic. This is no surprise when the labour cost differentials between regions are so high, transport costs are at record lows, and trade barriers are disappearing.

However, cost reduction is only part of a richer seam of strategic possibility. The key question companies should be asking is what they are expecting their global manufacturing network to deliver. Lowest cost is one outcome. Other factors include the ability to serve customers rapidly with high-quality products and services.

For example, companies may wish to offer customised products on a make-to-order basis. They almost certainly want to leverage global scale in developing new production processes and products that can be deployed around the planet, so they are constantly one step ahead. And, with environmental issues demanding ever-increasing attention, they need to make sure we are meeting sustainability objectives.

High stakes

There are clear benefits to footprint optimisation. Managing the network as a whole rather than as a collection of independent plants also brings additional advantages such as access to the best resources and suppliers. It also brings the ability to shift production in response to unplanned market or macroeconomic changes. And it provides hedging against business risks such as currency shifts and taxation.

So why have so few of today's leaders managed to develop a truly optimised global footprint? Reasons for slow progress have included production transfer complexity, supply base immaturity, management skill shortages, poor infrastructure and unstable politics.

The organisational structure of large companies is an additional factor that hinders rather than helps. In today's decentralised organisation, there is no strong hand to guide a coordinated, visionary and sustained effort across the enterprise. For many companies the result is ad hoc offshoring/outsourcing coupled with incremental investment that tends to preserve the status quo.

However, it is also clear that the stakes associated with footprint strategy are very high. The benefits are potentially huge but execution is difficult, hazardous and requires long-term, determined effort.

The authors are senior industrial fellows at the Institute for Manufacturing, University of Cambridge. This is an edited extract from the IfM report 'Making the right things in the right places'. www.ifm.eng.cam.ac.uk [new window]